Covered Bonds

Germany’s Aareal Bank launched the first Pfandbrief of 2012 on Monday, targeting a no-grow €500m four year transaction. With the deal size fixed, the issuer prioritised pricing, managing to defy bankers’ expectations and price inside guidance of 60bp area — and inside the curves of other second tier German issuers.

Australia and New Zealand Banking Group became the first Australian issuer to launch a second syndicated benchmark on Monday. Looking to differentiate itself from dual five year euro debuts from Commonwealth Bank of Australia and National Australia Bank last week, the borrower tapped the crowded long end with a 10-1/2 year jumbo.

A better gauge of the depth of covered bond demand is likely this week, as bank arrangers test appetite for slightly more challenged credits. Of the four deals currently in the market, three are not considered the best or easiest names to sell — not that that should necessarily be a problem — provided the spread is right.

Despite being the most expensive UK covered bond in sterling, Barclays Bank’s inaugural benchmark which priced on Thursday, met with a resoundingly strong reception – boding well for follow on deals from RBS, other UK issuers and possible other European names too.

French top tier borrowers have issued nearly €5bn of 10 year paper in three days, meeting demand from insurers and asset managers on the hunt for generous yields. The bonds in the secondary market have all held in, but the ten year maturity may not be such an automatic choice now for other French issuers that follow next week.

Covered bond traders reported that Australian inaugurals from Commonwealth Bank of Australia and National Australia Bank have traded as much as 10bp tighter in the secondary market, a welcome contrast to the dollar debuts of Westpac and ANZ last November.

The covered bond market enjoyed its busiest week since this time last year, with 10 issuers raising a collective €15bn versus the 15 borrowers who raised €18.5bn in the first week of 2011. But if past form is a guide, the rush of new issuance does not in any way indicate that the markets will remain buoyant in the longer term.

National champions led the frenetic re-opening of the covered bond market this week, but the range of spreads on offer was a clear sign that the credit curve has widened sharply since this time last year.

Banks went on a binge of bond funding as the covered bond and senior debt markets reopened after long gaps. Investors devoured €15bn of covered paper and €10bn of senior.

Société Générale launched the third long dated French benchmark in as many days on Thursday. German investors in particular gave the benchmark trio a vote of confidence, an encouraging change of stance as many had held off from participating in French trades towards the end of last year, according to several market participants.

National Australia Bank launched its debut syndicated covered bond in euros on Thursday, a day after Commonwealth Bank of Australia sold an impressive €1.5bn inaugural trade in the same maturity and currency.